They say the lights are much brighter there, you can forget all your troubles and forget all your cares. Things will be great there, as the song goes. But not for old-line department stores that are abandoning their downtown flagship stores faster than you can say, Petula Clark.
A four or five-story Macy’s on Herald Square topped off by 30 or 40 stories of residential is not so farfetched. The funny thing is that they might still be able to make the claim of being the largest department store in the country. Just hope they keep the wooden escalators.
Follow the Money
Ever since the end of World War II and the start of the great migration to the suburbs, department stores have been on a deliberate march to follow their customers. This diaspora gave rise to the great American shopping center, endless strip centers clogging up previous feeder thoroughfares to town centers and created all manner of retail complexes from the ill-fittingly named lifestyle centers and outlet malls to just plain suburban retail sprawl.
But the downtown flagships endured even as their businesses eroded…that is, until the big wave of retail consolidations took place during the waning decades of the 20th century. The mashups of companies like Allied Stores, Associated Dry Goods and others reached a crescendo with Federated’s acquisition of the May Co. and the subsequent merging and purging that resulted.
The re-engineered Federated network brought about the widespread retreat from downtown stores in many second and third-tier cities across the country. Even if one nameplate remained open, it wasn’t for long leaving empty real estate contributing to urban ghost towns (think St. Louis).
Downtown Flagship Stores Be Gone
But recently something else entirely is going on. Over the past year or so we’ve seen reports of the closing of once-landmark stores such as Bloomingdale’s in San Francisco and the projected purgatory of its sister store Macy’s a few blocks away on Union Square, which the company says will be closed but has not provided a date. Also set to close is the former John Wanamaker in Philadelphia — now a Macy’s too – in what is certainly bittersweet since Wanamaker is generally conceded to be the first modern department store ever.
Now the latest headlines come from downtown Dallas where just a few weeks after buying the NM business, Hudson’s Bay Co. said it would be closing the Neiman Marcus location there, a store that has been the brand’s flagship for over a century. HBC’s Saks Global division – now the name for the merged brands – cooked up some cockamamie yarn about being forced to close due to a stubborn landlord. It was reported in the local press that the closing was inevitable because of a slither of land underneath the store that couldn’t be negotiated for a new lease. Is this Richard Baker real estate shenanigans? Oh, and yes, Saks Global also has a bridge to Brooklyn you might be interested in.
Downturns
So, what gives? Why this latest wave of closings? As with most things in the retail business, there’s no single, simple explanation. In no particular order, here are three major reasons why.
- Corporate Downsizing.
Macy’s, which after its merger with May Co. in 2005 (can you believe it was 20 years ago already?), had close to 1,000 department stores. It has gradually winnowed down that store count, leveling off to around 600 several years ago. But under both former CEO Jeff Gennette and current leader Tony Spring things have gotten more aggressive, and it’s expected by the time the carnage is over that the final count will be closer to 350. Many thought this would primarily involve B- and C-level suburban locations in dying malls. But the Wanamaker and SF closings clearly indicate there are no sacred cows. With department store market shares continuing to slide, the big store fleets are as anachronistic as Cadillac Fleetwood Broughams. - Real Estate Dealings.
Even if the downtown commercial office space market is in the toilet right now since Covid strip mined office buildings, those locations do offer compelling reuse stories. Millions of square feet of residential conversions are taking place throughout downtowns across the country and if every big old hulking store footprint doesn’t necessarily lend itself to being transformed into condos and apartments, many do. Out in the suburbs, the demand for retail space seems to be unhinged and yesterday’s 250,000 square-foot mall anchor is tomorrow’s pickleball court, Buster and Dave’s and Ikea…not to mention a couple of TJX locations thrown in for good measure. When is a lightly trafficked mall store worth more dead than alive? Now. - Balance Sheet Balancing Act.
Let’s face it, most department store companies – at least the ones that are still public – don’t have the prettiest P&L statements. There’s usually some debt and not enough cash being thrown off to service it; Wall Street types are circling in for the kill. So, the urge to purge some valuable real estate and remove some troubling blemishes from your holdings becomes awfully tempting as shopping continues to move online and to other formats like smaller stores, outlets and whatever’s next. The street never saw an asset sale it didn’t love.
What’s Left?
Just as every major city used to have multiple newspapers and several sports teams, these days you’ll find many downtowns with maybe one department store anchor left…and often there’s not even that. When Neiman’s in downtown Dallas and Macy’s in Philadelphia close, they will join such other large American cities as Los Angeles, Atlanta and Houston without a single city center department store. Branch stores in all those areas continue and some, like the Lenox Square Macy’s in the Buckhead neighborhood of Atlanta, essentially function as defacto flagships but in downtown, the biggest retailer is probably a CVS.
So, is this it then? Have we reached the natural end of the flagship progression? Not necessarily if you think of it as real estate, not shopping centers. The Macy’s in The Loop in Chicago (still agonizingly referred to as Marshall Field by died-in-the-wool locals) had its upper floors truncated several years ago and it wouldn’t be all that difficult to imagine the entire store being converted to something else.
That two-step lobotomy process is also a possibility for Macy’s fabled Herald Square flagship — yes, it still is the largest department store in the country, if not the world in case anybody wants to measure – if the bankers get a hold of things.
It’s already been projected that the building alone is worth more than the entire book value of Macy’s Inc. although that was before Midtown Manhattan’s 29 percent vacancy rate for commercial office space. Macy’s flagship is another candidate for teardown and residential development (though most of the people living in the Herald Square neighborhood are living on the streets rather than in deluxe apartments in the sky).
For the remaining city center department stores – it’s a short list, folks: Seattle and Boston trailing New York (if you can make it there you can make it anywhere comes to mind) is likely the best scenario. For the retail stores to remain, they will need something else to bolster their financial balance sheets. It’s not pretty but it’s fact.
So, a four or five-story Macy’s on Herald Square topped off by 30 or 40 stories of residential is not so farfetched. The funny thing is that they might still be able to make the claim of being the largest department store in the country. Just hope they keep the wooden escalators.
